Last month, something historic happened inside famed coffee chain Starbucks (SBUX -1.02%). You might have missed it if you blinked because it wasn't something Starbucks' corporate wanted to promote. In Buffalo, New York, a Starbucks location became the company's first to form a union. Since then, another site nearby also voted to form a union.
This isn't making national headlines, but investors should monitor the situation for momentum. Here is what you need to know about the potential investment impact of a unionized Starbucks workforce.
Image source: Getty Images.
Unions can be bad (for profits)
A labor union is an organized association of workers within a particular trade or company. In other words, workers pool together to leverage their collective influence on an employer as it might relate to their interests, including wages, benefits, hours, etc.
Unions can be great tools to help workers get the compensation they feel they deserve. But for employers, unions can create real headaches.
Traditionally, many companies dislike unions because they tend to drive up the company's operating costs. A 2015 study by the U.S. Bureau of Labor Statistics found that employers paid out an average of $29.83 per hour in total employee compensation for nonunion workers but paid $46.50 per hour for union workers. That's a 56% increase.
Starbucks is vulnerable to unions
Many restaurant chains utilize a franchise business model, where store operators called franchisees pay the company for the branding and rights to operate a store. The franchisee is in charge of staffing and maintaining the restaurant. The parent company ends up operating an asset-light business, basically only investing in marketing, product development, etc. Fast-food chain McDonald's is a prime example of a franchise stock.
Starbucks owns and operates 8,947 stores in the United States (about half of the 17,133 stores worldwide). The company staffs and funds these owned stores, so employee totals continually grow as Starbucks opens more stores each year. Here's a look at how the company's employee count has grown since 2014.
SBUX Total Employees (Annual) data by YCharts.
A business like Starbucks with so many workers would be susceptible to even a slight increase in per-worker costs simply because there are so many of them across the company. The coffee itself costs very little to make; employees are a store's biggest single expense.
What is the potential impact?
Despite just a couple of locations' employees having open discussions about forming a union, Starbucks founder Howard Schultz personally traveled to Buffalo to meet with local employees in the area. This shows just how important this matter is to the company.
What's happened since then? Two locations in Buffalo have successfully voted to form unions, and there are now union votes scheduled for three more locations. In total, 15 have filed petitions to vote since last month.
If a significant portion of Starbucks locations eventually form unions, it could squeeze the company's pricing power on its products. Raising prices is a critical component of driving revenue growth for the company. Starbucks closed its fiscal 2021 year last quarter, and revenue growth came from a 9% increase in comparable transactions and a 10% increase in the average ticket price (price increases).
If labor costs begin to escalate faster, it could pressure the company's profitability or force more aggressive price increases. Starbucks' ability to raise its prices reinforces the popularity of its brand, but it's probably not something investors want to take for granted. At some point, increasing prices too fast could impact store traffic.
Not likely a short-term risk
Remember, only a tiny fraction of the company's stores have formed unions at this point. This unionization would need to be something that spread to multiple regions and states to begin having any measurable impact on the financials of Starbucks.
But it is crucial to think ahead and look at any potential investment threats. The company's massive labor pool is a significant expense, and if unions someday spread across the business, it could have a considerable impact and become a more significant topic. Investors should monitor the situation over the quarters and years ahead; at the very least, it's interesting food for thought.
